No rewards in cash, no security in shares. What's a saver to do?

After last week's surprise cut, Clare Francis sees how to turn cheap money to your advantage

Last Thursday's shock decision by the Bank of England to lower interest rates might be good news for mortgage borrowers, but it deals another blow to savers.

With the base rate now at 3.75 per cent, its lowest level since 1955, it is inevitable that banks and building societies will cut the interest on savings and current accounts. Given the continued volatility in the stock markets, those with money to invest will be facing an even more difficult decision: either invest in bonds or equities and risk further losses, or keep the money in cash where any growth will be negligible.

"Some people would rather earn 3 per cent interest, safe in the knowledge that they won't lose any of their capital," says John Hatherly, head of global analysis at M&G. "[But] I think there'll be a lot of demand for corporate bonds and gilts, while braver investors will look at equities."

"The plight for savers worsens," says David Elms, chief executive of IFA Promotion. "And now is a good time to ensure they are getting the most for their money.

"With so many investment vehicles and factors to consider, the savings market can be baffling. It is vital that consumers consider all the options and seek independent financial advice to ensure they invest in the most suitable product for them."

However, home owners will have welcomed the decision by the Monetary Policy Committee (MPC), as lower interest rates will mean lower monthly mortgage payments for many. The 25 basis point cut will immediately affect tracker mortgages, though most lenders have yet to decide by how much they will reduce their standard variable rates (SVRs). So those with discount or variable-rate loans will have to wait and see.

Industry experts are warning borrowers not to assume they'll receive the full quarter per cent reduction. "Most banks and building societies are unlikely to reduce their SVRs fully in line with the base rate cut, so savers won't lose out as much," predicts Ray Boulger, senior technical manager at mortgage broker Charcol. This is because the money that lenders save by not cutting home-loan rates fully can be passed on to savers.

Halifax, the country's biggest mortgage lender, announced on Friday that its SVR would be reduced by 0.1 per cent, as would the other four HBOS mortgage brands, Bank of Scotland, Birmingham Midshires, The Mortgage Business and Intelligent Finance. Sainsbury's Bank and the One Ac count are passing the full 0.25 per cent cut on to borrowers.

Those with fixed-rate mortgages will obviously be unaffected by the MPC's decision, and for those looking to take out a fix, there is little point waiting any longer. Brokers think it unlikely fixed rates will come down much further as the money markets (which lend providers the money for mortgages) have been anticipating an interest cut for some time, already pricing it into their rates.

And Mark Harris, director at broker Savills Private Finance, says anyone wanting to take out a discounted mortgage should act quickly. The best discount currently offered by Savills is a Bristol & West deal with 2.4 per cent off, giving a current pay rate of 3.55 per cent. If Bristol & West decides to pass on the full 0.25 per cent cut to borrowers, the pay rate will come down to 3.3 per cent. But Mr Harris believes that with many SVRs likely to be reduced, any new discounted products probably won't be as competitive.

Anyone who is not tied into their current home loan should consider remortgaging now to take advantage of the historically cheap loans that are available.

"Despite the recent gloomy commentary about the property market, Thursday's cut in the base rate is encouraging news for all prospective and existing home owners," says Simon Holdsworth at Towry Law Mortgage Services. "So whether people are looking to purchase for the first time or remortgage their current property, while rates remain low all borrowers would be prudent to investigate the great deals on the market."

But how much of a gamble is the Bank of England taking with its latest cut? Despite pressure from manufacturing industry, the MPC had resisted reducing rates sooner because of fears that any cut would add more fuel to an already booming property market.

However, there have been signs that house price inflation is starting to cool. The latest figures from the Halifax show prices rose by an average of 1.5 per cent in January, representing a year- on-year increase of 24.9 per cent but a comparatively small monthly rise. Although the Halifax is expecting annual inflation to fall to 9 per cent by the end of 2003 (against 26 per cent in the last quarter of 2002), some experts believe last week's base rate cut will help to protect the market against price falls.

Nevertheless, many analysts had expected the Bank of England to wait another couple of months before lowering rates to get a clearer picture of the cooling down. And that has prompted the question of whether the MPC might have moved too soon.

Mr Harris thinks not: "It's only a quarter of a per cent cut so I don't think it'll have much of an impact on property. If they were worried it would fuel house price inflation, they wouldn't have done it."